The construction industry is still smarting from the recession. Some notable public projects combined with new statewide reforms could provide a boost.
There’s no doubt that for those in the construction industry, recent years have been more than stingy as far as new projects go. Commercial work has trickled forth as slowly as tree sap on a cold January day. And while unemployment among construction workers nationwide has dropped, it still remains in the double digits.
The U.S. Census Bureau is projecting overall construction spending will rise in 2011 compared to 2010. In a Jan. 3 forecast, the bureau estimated spending at a seasonally adjusted annual rate of $807.1 billion. (Actual year-to-date construction spending through November totaled $724.8 billion, down from $743.6 billion for the same period in 2010.) Of that, $278.6 billion was attributed to private nonresidential construction and $284.9 billion came from public projects. While spending on public projects was up 1.7 percent from October, it decreased 5.3 percent from November 2010.
Meanwhile, national unemployment rates among industry workers fell from 18.8 percent in November 2010 to 13.1 percent a year later, according to the U.S. Bureau of Labor Statistics, though the bureau speculated the improvement resulted more from former construction workers finding new careers rather than the overall slight gain in new construction jobs for the same time period.
Those national trends are mirrored in Central Ohio, a region buoyed by a sea of larger projects that have propped up the industry. The questions heading into 2012 are how long it will last and will everyone benefit?
“We’ve got some significant programs coming online, but not everyone can play in that arena,” says Richard Hobbs, executive vice president of the Associated General Contractors of Ohio, ticking off a series of large public and public/private projects that have been launched or completed, including the Ohio State University Medical Center expansion, an expansion at Nationwide Children’s Hospital, Penn National Gaming’s casino on Columbus’s West Side and ongoing development at Ohio University. “I would think we’re more optimistic than we were six months ago,” he says.
Where’s the Work?
Hobbs’ tepid response might reflect the nervousness that has percolated throughout the industry in the last several years, exacerbated by the implosion of the housing market and tightening of credit triggered by the 2008 financial crisis.
The after-effects of that meltdown continue to roil the economy, leading to austerity measures being embraced by national, state and local governments. In October, for example, the executive director of the Ohio Department of Transportation told a national transportation association that his staff is dealing with declining revenue sources and is focused on stretching every dollar.
“There’s a limited amount of resources for an unlimited amount of wants, desires and needs. We have to focus on the basics: what improves safety, the economy, and the quality of life for the people of Ohio,” Jerry Wray told the American Association of State Highway and Transportation Officials.
ODOT will see its state appropriation slashed from $14 billion in 2011 to $10 billion for both 2012 and 2013. Furthermore, the biennial budget cut local government funds roughly 12 percent this year to $577 million and nearly 40 percent more, to $348 million, in 2013.
As a result, local contractors are expecting the number of public transportation projects to decrease. “There has been a nice flow of public work, and that has been helpful, but we do expect that money to contract,” says Mark Corna, president of Corna Kokosing Construction Company. “There is definitely going to be a sea of change.”
Over the past two years, Westerville-based Corna Kokosing served as the construction manager for the $19 million Columbus Commons project Downtown and $7.2 million in renovations at the Columbus Museum of Art. Though those weren’t the only projects the company took on, each attracted a substantial amount of public interest and attention.
Corna said these bigger projects coupled with new school construction helped stem the “freefall” the industry went through at the end of 2008. His company alone saw the cancellation of $350 million in contracts. It’s been, he says, one of the bleaker periods of his career.
“We realized this was going to be a deep and long recession,” says Corna. The company cut its overhead and some workers and began taking a lot of smaller jobs in anticipation of the slowdown. “I’ve been doing this for 40 years, and even during the ’80s recession, [the market] came back and took off like a rocket. I don’t see much of an impetus to do anything.”
Even as funding tightens, contractors are keeping their eyes on the Ohio Department of Administrative Services, which is putting the final touches on reforms that were passed as part of the state’s biennial budget and signed into law by Gov. John Kasich in July. Those initiatives change laws for public construction projects, with the goal of saving taxpayers money and cutting the amount of time it takes to get a facility built.
Contractors view the reforms as a step in the right direction. “It has traditionally been an adversarial process where everyone is out looking for themselves, whether it is the contractor, the architect or the engineer, but now we’re heading into a more collaborative effort,” says Kyle Rooney, vice president and general manager of Turner Construction Company’s Columbus office. “What it is doing is reverting back to a century ago when there used to be people called master builders who did all the design and construction.”
Central to the reforms is the elimination of a requirement that public projects follow a multi-prime contracting method where separate contractors must be used for construction, ventilation, plumbing and electrical on any work exceeding $50,000. The reforms raise that threshold to $200,000. Single-prime contracting can be employed, but public bodies—schools, public universities and state buildings—don’t have to use it.
The reforms outline two types of single-prime work: design-build that lets one company oversee all the design and construction; and construction manager at risk, which places one company in charge of all aspects of a project.
Calls for construction reform are not new to Ohio’s landscape—most of those adopted already are common within the private sector—but the budget crisis lent a sense of urgency to enacting the new rules.
“The whole issue of construction reform in Ohio has been on our mind for decades. We never could get true construction reform because it was very narrow … and very political,” says attorney Jeff Appelbaum, who leads the construction law practice group at Thompson Hine from the firm’s Cleveland office.
Appelbaum, who’s also managing director of firm subsidiary Project Management Consultants, was asked by Gov. Ted Strickland in 2008 to chair a construction reform panel. Kasich had Appelbaum continue the effort when he took office in 2011.
The reforms literally pull the state from laws originating in the 19th century into the 21st century, Appelbaum says. Previously, Ohio was the sole state in the union to employ a multiple-prime method, and it didn’t allow electronic procurement related to construction projects. “We were not of this century in terms of any of these procurement methods,” he says.
Proponents say the bottom line is that construction reform will save the state and other public institutions money. Appelbaum says the design-build method of construction, for instance, can shave 20 percent off standard construction costs.
Rooney says Turner Construction, which is overseeing a $1.1 billion expansion at the OSU Medical Center, has been able to save the university $25 million and cut the project timeline. “Construction reform is trying to emulate what the private developer has been doing for years,” Rooney says.
Some of those cost savings resulted from a method of construction that Turner has been using for the last three years, including on the OSU project: building information modeling. BIM is used to construct a 3-D model of a structure, allowing for near-pinpoint accuracy when ordering materials and improved coordination once the actual construction begins.
“Buildings have been built in essentially the same manner for centuries—you put one brick on top of another. And until BIM, we still had to do a lot of stuff the same old way. This is like an Erector set, you just put it together. It’s just so much faster,” Rooney says.
With university approval, Turner also is using the medical center build as one of a few test cases to illustrate the predicted versus actual value of construction reforms.
To Bid or Not to Bid?
Companies that know how to slog through the multi-prime contracting method aren’t the only ones anxious to see the reforms in action. There’s also buzz among construction companies that generally shun public projects due to the multi-prime requirement and overall costs of working with a government organization.
“I would tell you that we are watching it closely,” says Gregg Schmitt, vice president of marketing and planning for Columbus-based Lincoln Construction, which last year booked $51 million of work in Central Ohio, including renovating a lab and athletics center at Denison University and renovating dorms at Ohio Wesleyan University, both private institutions. “The theory to allow more collaborative work is good.”
That sentiment is echoed by Pat Zollars, who owns Westerville-based Contracting Solutions, a smaller firm with a staff of 17. He also shies away from public work because it is often too expensive for a company his size to bid on a project. “But most of the reason we don’t bid on them is the bureaucracy,” Zollars says.
Contracting Solutions has performed work for the Columbus Metropolitan Library system—most recently renovating a homework help center—but 93 percent of the company’s business is in the commercial sector.
Zollars says his business has increased in each of the last three years. He says he keeps the company in a zone where he feels comfortable, without overextending resources, and it gets paid relatively quickly, all the more important given the economic climate. “The competition is the killer; it’s just nerve-wracking,” he says.
Indeed. The AGC’s Hobbs says while big projects—public and private—rule the current construction scene in Central Ohio, the climate is not as good for the medium to small companies. Some of them have been working off portfolios secured before the recession took hold, while others must face off against larger companies that are picking up smaller jobs because of the economy. “The medium-sized project, we still see a soft market. Some companies are just struggling to maintain,” he says.
Corna says even with reforms and new methods of delivering projects, until the economy straightens out, uncertainty will continue to be the status quo for public bodies and the construction companies who build facilities for them. “The overriding trend is how these municipalities are going to deal with a loss in funding. What we are going to need is a turnaround in the economy,” he says.
Craig Lovelace is a freelance writer.
Reprinted from the February 2012 issue of Columbus C.E.O. Copyright © Columbus C.E.O.